Contractual Attorney Fee Provisions: Words Matter

This blog entry provides an analytical metric for double-checking assumptions about application of Civil Code section 1717 and contractual attorney fee awards. As the case law demonstrates, it is easy to misapprehend how and when the statute actually operates.

Section 1717(a) states that “In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the prevailing party on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney fees in addition to other costs.” Section 1717(b)(1) states that “[T]he party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract.” And section 1717(b)(2) states that “Where an action has been voluntarily dismissed or dismissed pursuant to a settlement of the case, there shall be no prevailing party for purposes of this section.”

It sounds straight forward and if section 1717 applied to every single suit involving a contractual attorney fee provision, it would be. But of course, it’s not that simple. A two-step analysis of attorney fee provisions in contracts may be helpful in determining the applicability and reach of section 1717.

The first step is to examine the scope of the fee provision. When the language is narrow, such as “actions on the contract” or “action to enforce the contract,” section 1717 governs and in mixed cause of action litigation (for e.g., tort and contract claims), any fee award must be apportioned such that fees are only awarded for the contract claims. (Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal.App.4th 698, 709 (fee provision for “action . . . to enforce the terms” of a lease does not encompass tort claims).) So when the scope of the fee provision is limited to contract claims, then whether or not noncontract claims are also litigated, section 1717(a)’s reciprocity rule applies, the prevailing party (for fee purposes) will be section (b)(1)’s party prevailing on the contract claims, and dismissal prior to trial will trigger section (b)(2)’s complete escape hatch as to the opponent’s claim for attorney fees.

But what if the attorney fee language is broadly worded? Broadly worded fee agreements include language such as claims “arising out of” or “relating to” the contract, or “any dispute” under the contract. (Santisas v. Goodin (1998) 17 Cal.4th 599, 607; Drybread v. Chipain Chiropractic Corp. (2007), 151 Cal.App.4th 1063, 1071-1072 (“any action or other proceeding arising out of this [contract]”); Wakefield v. Bohlin (2006) 145 Cal.App.4th 963, 973 (“any legal action . . . arising out of this Contract”) (overruled on other grounds).) And when the language in a fee provision is broad, Section 1717 can have some or no application.

The second step in the analytical metric, which arises after confirming a broadly worded fee provision, is to ask whether noncontract claims such as torts are being litigated. If the answer is “no,” then section 1717 governs because despite the broad wording in the fee provision, the only thing being litigated is an “action on a contract.” But if the answer is “yes,” noncontract claims are being litigated, things can get tricky.

For example, when a broadly worded fee provision is at play andnoncontract claims are being litigated (alone, or with contract claims), 1717(b)(1)’s prevailing party definition does not apply. (Maynard v. BTI Group, Inc. (2013) 216 Cal.App.4th 984, 992.) Instead, “the prevailing party entitled to recover fees normally will be the party whose net recovery is greater . . . whether or not that party prevailed on a contract cause of action.” (Ibid.) In addition, when a broadly worded fee agreement is at play and noncontract claims are being litigated, 1717(a)’s reciprocity principle does not apply, so a party can prevail and not be awarded fees because the fee provision is unilateral. “Tort and other noncontract claims are not subject to section 1717 and its reciprocity principles.” (Brown Bark III, L.P. v. Haver (2013) 219 Cal.App.4th 809, 820.) As for dismissal prior to trial under 1717(b)(2), such dismissal will only relieve the plaintiff of paying fees for the contract claims because “causes of action that do not sound in contract . . . are not covered by section 1717 . . . .” Santisas, supra, 17 Cal.4th at p. 617.

To recap, just some of the wrinkles that apply when a fee provision is broadly worded and noncontract claims are litigated include the following: (1) even though the right to fees rests on a contractual fee provision, section 1717(a)’s reciprocity rule does not apply; (2) contractual right to fees notwithstanding, section 1717(b)(1)’s definition of prevailing party does not apply and Code of Civil Procedure section 1032 applies instead; and (3) in mixed cause of action litigation, dismissal before trial can still enable the plaintiff to avoid paying fees for the contract claims but not for the tort claims.

Despite what appears to be straighforward stautory language, there is nuance in the actual application of section 1717. As noted above, the case law illustrates that it is easy to either misunderstand or overlook something that can be the difference between success and failure. If the reader has been startled in any way, then perhaps this two-step analysis will help. So when it comes to contractual attorney fee awards, start with the actual words of the fee provision because words matter.